Sub-Prime Lending: Agencies Propose to Collect Sub-Prime Loan Information

Sub-prime lending is a hot issue for a lot of reasons. It theoretically carries out the goals of CRA by bringing credit to those whose credit needs have not been met or those who have credit problems.

Sub-prime lending also provides lenders with the opportunity to take unfair advantage of customers. When this happens, the lending becomes predatory. And yes, predatory lending can also take advantage of prime customers, so predatory and sub-prime lending are not the same thing.

Finally, sub-prime lending presents risk simply because the borrowers are not prime borrowers. So in addition to the consumer protection concerns, sub-prime lending raises safety and soundness concerns. It is a hot topic no matter how we look at it. It wasn't enough to tinker with Regulation Z and HMDA to generate information about sub-prime lending. That's in the consumer protection arena. Now the agencies are proposing to collect information about sub-prime lending on call reports.

Initially, reported information about sub-prime lending would be confidential. This indicates that the agencies anticipate high sensitivity levels about the information. After receiving and studying the information on call reports, the agencies may decide to make the information publically available.

The reports will apply the definitions of sub-prime loans that were expressed in the January 31, 2001 guidance on sub-prime lending issued by the agencies. A lender that offers a sub-prime lending program would be required to report on the amount and volume of that lending. The definitions of "sub-prime" and "program" are contained in the January 31, 2001 guidance.

An institution has a "program" when it makes subprime loans on a regular or targeted basis. A program includes the practice of originating or purchasing subprime loans and either holding these loans in portfolio or packaging them for sale. The regulatory concern lies primarily with loans sitting in portfolio.

"Subprime" is used to describe the credit characteristics of the borrower. This includes borrowers with judgments or similar actions within the previous 24 months, two or more minor delinquencies in the previous 12 months, bankruptcy within the last five years, a credit bureau scores below 660, or a high debt service ratio. These characteristics are illustrative, not exclusive. The agencies made clear in their issuance that the definition of a subprime loan or a subprime lending program is fluid.

Copyright © 2002 Compliance Action. Originally appeared in Compliance Action, Vol. 7, No. 10, 8/02